Water Affordability in England and Wales. A report prepared for CCWater. Dr. Carolyn Snell and Professor Jonathan Bradshaw

Transcription

1 Water Affordability in England and Wales A report prepared for CCWater Dr. Carolyn Snell and Professor Jonathan Bradshaw Revised 26 th March 2009

2 TABLE OF CONTENTS Executive summary.. 3 SECTION ONE: Introduction... 5 SECTION TWO Analysis of the FRS 6 SECTION THREE Findings...7 SECTION FOUR Assessing policy responses..13 SECTION FIVE Assessing proposals made by CC Water SECTION SIX Conclusions..17 APPENDIX A literature review APPENDIX B FRS Tables

3 EXECUTIVE SUMMARY Background Water poverty is a growing problem as a result of increasing prices. For the purposes of this report, the standard measure of affordability (3 per cent of net income spent on ) is used. Key issues in addressing poverty include the regional variation in bills which reflects the different financial needs of companies who hold regional monopolies. This is not reflected in any statutory forms of support to help people manage their bills, such as the notional component of income support. Regional variation in bills creates a unique difficulty among the essential utility services in arriving at a national solution; the issue of how to provide fairly the necessary support to customers with widely varying bills is problematic. Research methods Data from the Family Resources Survey (FRS) has been used to analyse the socioeconomic characteristics of those at risk of poverty in England and Wales. Analysis of the most recent data (2006-7) found that 14.6 per cent of the population were in poverty. Use of FRS data has meant that we are unable to break down findings according to company, due to differences in categorisation between FRS regions and company regions. However, this does not impact on national averages. Research findings Using the 3 per cent poverty level, risk of poverty varies with the regional location and characteristics of the household. The following groups are all found to be at increased risk of poverty: o Amongst benefit recipients, 33.3 per cent of those receiving Child Tax Credit (CTC) and who are at risk of poverty are poor. The second highest figure is amongst those receiving Income Support (IS) or Job Seeker s Allowance (JSA), with 30.9 per cent defined as poor. Also, amongst those receiving Pension Credit, Housing Benefit or Council Tax Benefit, 28.3 per cent are poor. o Of all those households in poverty, 30.7 per cent are single pensioners. o Of single occupancy households, 23.4 per cent are poor. Also, of all the poor, 54.4 per cent are single occupancy households. o Of those households with no workers¹, 28.5 per cent are in poverty. Also, amongst all those defined as poor, 71.6 per cent are households with no workers. o Of those in the lowest income quintile, 54.9 per cent are in poverty. Of all those in poverty, 71.3 per cent are in the lowest income quintile. ¹ Households with no workers are not necessarily entitled to benefits e.g. students, savings above a certain level, retired or not working out of choice. 3

4 o Regional variation: at regional 1 level the highest proportion of poor households is Wales, with 20.2 per cent of households living in poverty. This is closely followed by the South West with 19.9 per cent of households living in poverty. o The poverty rate is double the average for single pensioners, other tenure household groups, households on IS, JSA, or CTC, workless households, and the bottom income quintile. Several ways of mitigating poverty using receipt of benefits were tested. o A scheme targeting out of work benefit/tax credit groups would help up to 24.2 per cent of households in poverty and cost 447 million per year o A scheme targeting low income working households would help up to 6.5 per cent of poor households and would cost 289 million per year. There are three problems with using receipt of means-tested benefits as a passport to poverty relief. 1. The majority of households in poverty are not receiving meanstested benefits/working tax credits. Only 24 per cent of those out of work and only 6.5 per cent of those in work. 2. Some of this may be due to non take-up of benefits. But even if takeup was 100 per cent a passport on means-tested benefits would still not reach all or a majority of the poor. 3. People do not correctly report that they are receiving means-tested benefits in the FRS. In the case of Pension Credit we know what proportion that applies to because DWP have matched FRS responses against benefit records but for the other benefits/tax credits we don t know. But it would only marginally increase the percentage of the poor covered. In conclusion no single way of targeting help was found that would allow for an ideal passport. Either significant numbers in poverty were omitted from support and/or significant numbers not in poverty would be helped. Other methods for addressing poverty, aimed at targeting those in poverty rather than based on a passport benefit, are indicated in the interests of efficiency and equitability. 1 These are Government Office regions not company regions. So for example Wessex Water and South West Water are in the South West Region. Thames Water covers a much larger area than London and Seven Trent Water covers the East and West Midlands. 4

5 prov prov Average Charge ( ) 1 Introduction The burden of increasing energy prices on poorer households is acknowledged by both policy makers and academics. Policies to ensure that households are still able to use sufficient energy have been developed alongside measures that encourage energy efficiency (which has both cost and environmental benefits). However in terms of increasing costs illustrated in Figure 1, it is clear that these have been rising in real terms. Figure 1: Average and sewerage bills in 2007/8 Average Water and Sewerage Charges by Company Anglian Dwr Cymru North West Northumbrian Severn Trent South West Southern Thames Wessex Yorkshire (incl. York) Year Source: OFWAT 2007 This increase is the result of changes in legislation, particularly at EU level, and in some parts of England resource issues. The trend is expected to continue. Figure 2 shows estimates of how prices may change at the next price review, based on proposals in and sewerage company Draft Business Plans. Except for Dwr Cymru there are proposals for further real increases in all and sewerage company regions with particularly large increases proposed in the North West (United Utilities), Thames Water and Southern Water company regions. This is likely to create increasing numbers of households that are defined as poor (i.e. where more than 3% of household income is spent on costs). 5

6 Figure 2: Estimate real price increases 2009/ / /8 terms (%) Northumbrian United Utilities/North West Source: OFWAT Yorkshire Water Severn Trent Water Anglian Water Thames Water Southern Water South West Water Dwr Cymru CCWater commissioned researchers from the Department of Social Policy at the University of York to assess mechanisms within the tax and benefits system that might enable equitable access to supplies by those defined as poor. This research consisted of two elements, first, a review of existing knowledge on poverty; including an overview of existing forms of help for those struggling to pay bills (see Appendix A). The second part of this research has focused on an analysis of the Family Resources Survey (FRS) to investigate the extent of poverty in England and Wales, and the characteristics of households in poverty. It also considers the possibility of using a mechanism within the tax and benefits system to address this. 2 Analysis of the Family Resources Survey The FRS is an annual survey of a representative sample of 25, 000 households in the UK. It was established by the Department for Work and Pensions and was designed to provide good quality data on incomes and receipt of benefits. It is the source of the poverty statistics series Households below Average Incomes. It is extremely useful for this project because it not only has detailed income data, it also has a set of questions on charges. The analysis presented here selects the households in England and Wales (about 21,000) from the 2006/7 survey the latest available at the time of writing. The dataset has been used here to: describe variations in charges according to household characteristics; identify the characteristics of those spending more than 3 per cent of their net income on (the standard threshold for poverty); and estimate how successful a variety of ways of targeting help to certain groups of benefit recipients might be in mitigating poverty. The latest available FRS is 2006/7, however it is important to note that there will have been a number of movements in costs, prices, and incomes since then. OFWAT estimate that average bills increased from 5.60 per week in 2006/7 to an 6

7 estimated 6.00 in 2007/8. That is a real (controlling for prices) increase of 4.5 per cent. However between 2005 and June 2008 the element of the Consumer Price index rose 22.2 per cent compared with an all items rise of 8.3 per cent, thus there was a real price increase in of 13.8 per cent over that longer period. However income also rose during this period: earnings rose by about 11 per cent between 2005 and May 2008, not as fast as prices, but faster than overall prices. What matters to the poverty calculations are not just movements in prices but also changes in net income. The only estimates of movements in net income (but after housing costs) are produced by the Department for Work and Pensions (DWP), and only for a set of proportions of average earnings (half, two-thirds and so on). However many households dependent on benefits did not have income increases as large as average earnings (or net income). In fact at the moment only Pension Credit and the child element in Child Tax Credit are linked to the earnings index automatically. Other benefits are either linked to movements in retail prices (including the Basic State Pension, Child Benefit, Working Tax Credit, and disability benefits) or to movements in the Rossi (inflation after housing costs) index (JSA and Income Support rates for adults). So for example between April 2004 and April 2008, while the earning index rose by 15.4 per cent, the Retail Prices Index rose by 13.3 per cent, and the Rossi index by 8.5 per cent. 3 Findings 3.1 Spending on Based on the FRS data set, in 2006/7 average spending on was 5.85 per week ( 5.42 with a meter and 6.07 without a meter) which constituted 1.9 per cent (1.8 per cent with and 2.0 per cent without meters) of net household income 2. This is very close to the OFWAT estimate for 2006/7 of 5.60 per week ( 5.08 with and 5.83 without a meter). Average spending hides variation. It can be seen in Appendix A that spending on varies by family type, size, age group, region, benefit status, numbers of workers, ethnicity, presence of a disabled child and adult and income level. Water charges also vary as a proportion of household income, and not always in the same way as spending. Indeed spending is not very income elastic spending is higher for higher incomes but not much higher, while income varies considerably. Figure 3 plots expenditure by quantile group of net income (20 equal groups). It can be seen that the average charge (right hand axis) varies only from an average of 5.20 per week for the lowest income group to 6.90 for the highest income group. Water spending as a proportion of net income varies more from 8.3 per cent in the lowest group to 0.5 per cent in the highest income group. 2 Gross income less income tax and national insurance contributions 7

8 per week on poverty rate % net income per week Figure 3: Water expenditure by net income percentile: FRS 2006/7. Water expenditure by net income percentile: FRS 2006/ average % of net HH income on Average per week on 3.2 Prevalence of poverty In 2006/ per cent of households spent more than 3 per cent of their net income on (11.2 per cent with and 15.4 per cent without meters) Income & employment Figure 4 shows how poverty varies with income percentile group (20 equal groups). Figure 4: Water poverty by quantile group average per week on poverty rate (3% of income) Of those in the lowest income quintile, 54.9 per cent are in poverty. Of all those in poverty, 71.3 per cent are in the lowest income quintile. Closely related, of those households with no workers, 28.5 per cent are in poverty. Also, amongst all those defined as poor, 71.6 per cent are households with no workers. 3 This proportion is higher than the 12 per cent predicted for 2009/10 by Defra. Their estimates were based on analysis of the FRS for 2001/02 and 2002/3. Defra (2004) Cross-Government Review of Water Affordability report. 8

9 3.2.2 Regional variation Table 1 explores the variation in poverty by Government Office region. The region with the highest average charge is the South West which covers South West Water and Wessex Water. The highest proportion of poor households is in Wales (predominantly Welsh Water and Dee Valley Water), with 20.2 per cent of households living in poverty. This is only marginally higher than the South West area, where 19.9 per cent of households are defined as being in poverty. It is likely that, had we been able to show poverty at and sewerage company level, there would have been a distinct difference in poverty levels for Wessex and South West Water, as the latter has the highest average bill levels in England and Wales. Table 1: Variations across Government Office regions Region Average per week on % spending more than 3% Composition of those spending more than 3% on Composition of the sample NE NW/Mersey York/Humber EM WM East London SE SW Wales Total Family type Table 2 considers family type - single households, lone parents with one dependent, and single pensioners stand out as those most at risk of poverty. Of those who are single, 23.4 per cent spend more than three per cent of their net income on costs, 24.6 per cent of lone parents with one dependent, and 30.7 per cent of single pensioners spend more than three per cent of their net income on costs. Of all those deemed to be in poverty, 30.7 per cent are single pensioners, and 23.7 per cent are single households. 9

10 Table 2: Family type Family type Average per week on % spending more than 3% Composition of those spending more than 3% on Composition of the sample Single Couple C C C C LP LP LP Pensioner single 14.5 Pensioner couple 13.2 Multi-unit Household size is also of relevance. Of single occupancy households, 27.1 per cent are poor, and of all the poor, 54.4 per cent are single occupancy households Benefit/tax credit recipients Table 3a shows that 33.3 per cent of those receiving CTC and who are at risk of poverty (with an income less than 60 per cent of equivalent income) are poor. The second highest figure is amongst those receiving IS or JSA, with 30.9 per cent defined as poor. Also noteworthy is that amongst those receiving PC, HB or CTB, 28.3 per cent are currently poor. However only 37.1 per cent of those receiving any of the income tested benefits are poor. 10

11 Table 3a: Benefit recipients Tax/ benefit class 4 Average per week on % spending more than 3% Composition of those spending more than 3% on Composition of the sample IS or JSA HB or CTB PC PC or HB or CTB CTC or WTC CTC & at risk of poverty Any of the above 5 IB or DLA Any of the above None of the above It must be noted that with any solutions based on benefits, non-take up by individuals entitled to the benefit poses problems. The latest data on take up is shown below in Table 3b. This means that, for example, at most 90% of those entitled to Income Support take this up, and at most 60% of those entitled to JSA (income based) take this up. Table 3b: Benefit take up rates 2006/7. Tax Credit Take-up rates 2005/6 % of caseload % of expenditure Income Support Housing Benefit Council Tax Benefit Pension Credit JSA ib Child Tax Credit Working Tax Credit Sources: DWP (2008) Income related benefits: Estimates of Take-up HMRC (2008) Child Tax Credit and Working Tax Credit Take-up rates 2005/ Disabled children/adults in household Table 4 illustrates the levels of poverty in households containing disabled children or adults. The proportion of households containing disabled children is very low (3.5 per cent). Of those households with disabled children, 11 per cent are in poverty. The numbers are more striking amongst households with disabled adults. Firstly, there are more of these households, and of those with disabled adults These are not mutually exclusive categories, so the total may exceed 100% IS, JSA, HB, CTB, PC, CTC or WTC IS, JSA, HB, CTB, PC, CTC, WTC, IB or DLA 11

12 around 19.7 per cent are in poverty. Of those households currently in poverty, 44.5 per cent are those containing a disabled adult. 12

13 Table 4: Disabled children/adults in household Disabled child Average per week on % spending more than 3% Composition of those spending more than 3% on Composition of the sample No Yes Disabled child (DLA subtracted from income) Disabled adult No Yes Disabled adult (DLA subtracted from income) To summarise the most significant findings, the rate of poverty varies considerably with household circumstances. The rate of poverty is at least double the average for: Single pensioners Other tenure Households on IS/JSA, CTC and at risk of poverty, Workless households The bottom income quintile 13

14 4. Assessing policy responses The aim of this research project was to investigate whether the tax and benefits system can be used to address affordability, and if so, to assess the most appropriate benefit or tax credit. Any scheme for mitigating poverty needs to try to: Maximise the proportion of poor households covered Reduce poverty as much as possible Minimise the help going to the non poor Minimise the overall costs of the measure Be simple for consumers to understand and claim Be simple and cheap for operators to administer Avoid incentives to waste Avoid incentives to under consume With a poverty prevalence of 14.6 per cent it is unlikely to be easy to meet all these criteria at the same time. However with the envisaged increases in poverty more households will be affected. A number of methods were explored within this research, including demographic criteria, benefit receipt criteria, consumption level criteria and then all three in combination. The essence of a successful policy response to poverty is to reduce the burden of charges on those households suffering from the problem. This could be done by a price and/or income subsidy including: Cross subsidising tariffs between consumers and introducing a social tariff or subsidy. This is not the preferred option of CCWater as their research with customers indicates that they are generally opposed to the extension of social tariffs. This approach appears to be the one that is being followed by government in response to fuel poverty, however, it may be difficult to target this to appropriate groups given the nature of poverty (it affects a number of different socio-economic groups). Providing a public subsidy to the industry in respect of certain households to reduce their charges. Providing an income subsidy to certain households (like the winter fuel payment). Increasing benefits so that some or all the households are lifted out of poverty. Any of these and other measures need to be able to identify those at risk of poverty. We assume at this point that companies are unlikely to set up their own assessment of the ratio of charges to net income. Thus eligibility needs to be based on the verifiable circumstances of the household. This could be either: Their demographic characteristics for example a person in the household over 60 (as with the winter fuel payments) and/or Passported on the receipt of certain classes of benefit for example receipt of Income Support (as with free school meals) and/or Tied to the level of the bills - for example spending over the regional average and/or Other criteria perhaps connected to a meter. 14

15 In this paper we focus on proposals made by CCWater - to pay the difference between 3 per cent of income and the average bill for the region for consumers in receipt of Income Support or Pension Credit Assessing proposals made by CCWater In our modelling we have amended this so that the charges are capped at 3 per cent of the household income rather than the average charge for the region. While it may be a good idea to have a cap on the subsidy to avoid wasteful consumption, setting it at the regional average does not seem appropriate some will be in poverty paying less than the regional average and some will need to consume and pay more than the regional average. We have considered both out of work and in work households, and the results are presented below. 5.1 Out of work households and in receipt of income related benefits We have modelled CCWater s proposals for out of work households, and these are presented in Table 4. This scheme would cost million and would move 24 per cent of households out of poverty 8 9. The other 76 per cent of poor in out of work households are not recorded as receiving these benefits 10. There are other limitations of this scheme. Firstly means-tested benefits are not claimed by all those who are eligible for them. For example only between 59 and 67 per cent of pensioners take-up their entitlement to Pension Credit 11, and if receipt was used as a criterion for relief they would be doubly jeopardised. Non take-up is a problem for all the benefit based solutions. Secondly, the scheme only tackles poverty among workless households and households working only a few hours per week. 7 Housing Benefit and Council Tax Benefit are also considered but because they vary with rent and council tax and eligibility extends further up the income distribution they are rejected. 8 If the threshold was the average regional charge it would cover 19.6 per cent of the poor costing 273 million 9 Note this is the poor in 2006/7. 10 Pension Credit is under reported in the FRS. In 2004/5 Bradshaw and Richardson found that 19.2 per cent of pensioners reported receipt whereas DWP, checking administrative records, found that 26.9 per cent were in receipt. Richardson, D. and Bradshaw, J. (2008) Variations in the Take-up of Pension Credit, Benefits: the Journal of Poverty and Social Justice, October 2008, 16, 3,

16 Table 4: Water poverty rates amongst out-of-work means-tested benefit recipients ( ) Water poverty threshold % spending over 3% of benefits on % of total out of employment poor Average poverty gap 12 ( per week) Cost of closing poverty gap ( millions per year) 13 Pensioner single on PC Pensioner couple on PC Single not working 16 hours, on IS/JSA, Single not working 16 hours, on IS/JSA, Couple neither working 16 hours, on IS/JSA Lone parent + 1, not working 16 hours, on IS/JSA Lone parent + 2, not working 16 hours, on IS/JSA Lone parent + 3, not working 16 hours, on IS/JSA Lone parent + 4, not working 16 hours, on IS/JSA Couple +1, neither working 16 hours, on IS/JSA Couple +2, neither working 16 hours, on IS/JSA Couple +3, neither working 16 hours, on IS/JSA Couple +4, neither working 16 hours, on IS/JSA Total , In work households It is difficult to decide on a criterion for the working poor perhaps the best solution is to include all households receiving Working Tax Credit (WTC). In 2007/8 the threshold for coming off WTC was 11,500 for a single householder and 3 per cent of that is 6.63 per week. Table 5 applies that as the poverty threshold for all households receiving WTC and estimates that the cost of closing their poverty gap is million per year but it only helps up to 6.5 per cent of the poor 15. Number 14 Table 5: Water poverty gaps amongst non-recipients of out-of-work benefits who spend more than 6.63 a week on and sewerage ( ) 12 Water poverty gap defined as weekly charge minus 3% of benefit income 13 Based on 21,660,000 people in England and Wales, the cost of closing the poverty gap for each category is estimated as follows: (proportion of benefit family type in the entire weighted sample)*(average poverty gap for family type)*21,660,000*52/1.000, Unweighted 15 If the subsidy was the difference between the charge and the regional average it would help 10.5 per cent of in work poor and the cost 162 million per year. 16

17 % spending more than 6.63/week on % of total poor in work households Average poverty gap 16 ( per week) Water poverty threshold ( per week) Cost of closing poverty gap ( millions per year) 17 WTC recipients ,249 Unweighted N 16 Water poverty gap defined as weekly charge minus the regional average in 07/08 17 Based on 21,660,000 people in England and Wales, the cost of closing the poverty gap for each category is estimated as follows: (proportion of benefit family type in the entire weighted sample)*(average poverty gap for family type)*21,660,000*52/1.000,000 17

18 6. Conclusions In this paper we have focused on the proposals made by CCWater to pay the difference between 3 per cent of income and the average bill for the region for consumers in receipt of Income Support or Pension Credit. We have found the following: A scheme targeting out of work households in poverty will help up to 24.2 per cent of the poor and will cost million per year ongoing. A scheme based on working poor could help up to 6.5 per cent of poor households costing million. We also suggest that since price increases are likely to be very uneven in different regions, there are questions over whether there needs to be a national or a regional response. As demonstrated by the relatively low level of households captured in this analysis any method that passports eligibility on criteria such as benefit/tax credit groups (other than actual poverty) is going to suffer targeting problems. This is true of existing policy measures - for example not all those in fuel poverty are receiving the winter fuel payment. It remains a matter of judgement as to what degree of inaccuracy in targeting is acceptable, and such a proposal may face the criticisms that it will only help a minority of those in poverty. 18

19 APPENDIX A Literature review - Review of poverty Executive Summary Water prices have been and are proposed to continue to rise, leading to an increase in the number of households experiencing poverty. In addition to cost of living increases, three contributing factors are increasing levels of debt across the industry, stress leading to some companies introducing compulsory metering, and low take-up of WaterSure, the social tariff which is the only universal mechanism to help with charges. The conventional measure of poverty spending 3% or more of net household income on is used here. Prior to 1999, domestic supplies could be disconnected for nonpayment. Legislation prohibiting this ensured that all households have access to unlimited, but also removed the option of disconnection as a means to reduce outgoings for customers ie. Previously customers had the option, albeit an undesirable one, to choose disconnection to avoid accruing further debt -, or discourage non-payment for companies. The banning of disconnection also raises the problem of distinguishing between customers who can t pay bills as a result of poverty, and those who won t pay bills due to an awareness that this will not result in disconnection. It is therefore not possible to determine which customers are in poverty simply by looking at arrears. Water companies operate as regional monopolies: domestic customers cannot opt to use a different supplier. Water bills vary significantly between different companies as a result of regional differences in access to and standards of infrastructure. These differences are not reflected in the various forms of support for vulnerable customers in managing bills. Regional variation in bill levels is driven to a large extent by environmental and health related agendas, requiring companies to reduce wastage and ensure high quality. Regional variation is the factor that makes poverty unique amongst the utilities: in other areas, customers can choose from a range of suppliers, whereas customers are tied into their regional supplier irrespective of perceived value for money. This results in unique difficulties in supporting customers as national solutions do not address regional variation. Following the replacement of supplementary benefit with income support in 1989, charges were no longer included in rates through the housing benefits scheme. This impacted on poverty and debt for several reasons: benefit recipients were required to deal directly with companies for the first time, requiring the motivation to do so and a level of financial literacy; the notional component of income support did not cover the full amount of any region s bill; regional variation in charges was not

20 APPENDIX A Literature review - Review of poverty - continued addressed in income support levels; and the Rossi index was not applied to the element of income support between Academic findings agree that bills and debt are set to rise, along with levels of poverty. It has also been claimed that is the fastest rising area of debt for low-income families. Little work has been conducted into the qualitative impact of poverty on low income households. This area is complex as a result of forming a constant but relatively low financial commitment compared to other outgoings, and amongst non-metered households there is no room for flexibility in use and therefore in charges. Impacts of poverty have been found to include metal health problems, summonses over non-payment, worry, family tensions, and arguments. Where metering is in place, concerns have been raised that a desire to reduce bills may result in unhealthy and unhygienic measures. The Vulnerable Groups Regulations lay out the groups which companies are governmentally mandated to support, including people who for a range of reasons may need to use more or may struggle to access the supply, for example people in housing with no connection.. WaterSure, a social tariff based on the average bill for each region, is the only universal support mechanism aimed at households on low incomes. However, eligibility is based on the eligibility criteria of the vulnerable groups regulations, meaning that it is not responsive to anomalies placing households not defined as vulnerable in poverty. Whilst take-up of WaterSure is relatively low, it has increased recently due to several initiatives including the re-branding of the scheme by CCWater and increased promotion by companies. There are a number of conclusions drawn in this report. Firstly, the literature review (included as Appendix A) leads us to consider the nature of poverty as a policy problem. The relationship of debt to poverty is considered, as customers can fall into debt either by paying bills where these are not affordable, or by opting not to pay bills in favour of other bills. It is also suggested here that since provision cannot be removed, there is an incentive to prioritise other costs first. This makes it difficult to distinguish between customers who can t pay as opposed to customers who won t pay bills. Secondly, the empirical analysis of the poor finds that rates are at least doubled for single pensioners, those living in other tenure households, households on income support/job seekers allowance, child tax credit, and at the risk of poverty, workless households, and those in the bottom income quintile. It is also found that of the 4.1 per cent of the population spending more than 5 per cent of their net income on, the rate is doubled for singles of working age, single pensioners, those living in other 20

21 APPENDIX A Literature review - Review of poverty - continued tenure households, single households, households on income support/job seekers allowance, child tax credit, and at the risk of poverty, on housing benefit/ctb, or working tax credit, workless households, and the lowest income quintile. Thirdly, the empirical analysis has included an assessment of a policy solution through the tax and benefits system. A number of approaches have been tested, and it has been concluded that any such approach will be inefficient in the sense that it will not reach all the poor, and will also provide support to those not defined as poor. 21

22 APPENDIX A Literature review - Review of poverty - continued 1 Background Currently, increases in the level of prices coincide with increasing fuel charges and now food prices. For people on a low income in particular, such combined increases add pressure to already tight budgets. Against the general rise in the cost of living there are other factors at play in the industry that affect levels of poverty: There is an increasing level of debt across the industry - it has been estimated that a growing proportion of consumers will be paying more than three per cent of their net income on this being the conventional marker of poverty. 18 In addition to this, companies have the option of introducing compulsory metering programmes in parts of England which are classified as being areas of serious stress, as metering is believed to lead to a reduction in consumption. However, by moving households onto meters and changing the way they are charged for from a fixed annual bill to a variable bill based on usage, some households particularly large families - are at risk of higher costs. This leads to a concern that some consumers may be inclined to control their consumption in unhealthy ways in order to save money. Currently the WaterSure scheme - a social tariff - is the only universal mechanism to help people with their charges but it has a very low takeup and its eligibility criteria mean that it is limited to a small sub-section of the customer base. The government has encouraged the industry to develop social tariffs, as it has also done for the energy industry with some success. 2. Water poverty 2.1 Water poverty prior to and after 1999 Debates around poverty in England and Wales have emerged since privatisation. These focus around price levels and disconnection. Research conducted in the early 1990s into the effects of utility provision by privatised monopolies (at the time, gas and electricity all fell into this category), found that customers were at the greatest disadvantage as prices rose far more than any of the other privatised utilities (Drakeford 1997: 116). Prior to 1999 it was not illegal to disconnect domestic supplies for non-payment, and a number of researchers highlight an increase in dysentery and hepatitis in the early 1990s, linking this in part to the disconnection policy (Sawkins and Dickie 2008: 86, see also Lobina and Hall 2001). Equally, before 1998 restrictive flow devices were not illegal, and these were also associated with public health risks (often referred to as selfdisconnection). The nature of poverty as a policy problem has changed significantly since 1999, when it became illegal to disconnect household properties. The ban on disconnection has contributed to an increase of customers in debt with Castro (2007: 765) suggesting that In 2004 between 2 and 4 million households in England and Wales were living in poverty (see also Klein, 2003, Fitch and Price 2002, Greene, 18 This measure was proposed by Fitch and Price in 2002 and is currently the measure used by DEFRA. 22

23 APPENDIX A Literature review - Review of poverty - continued 2002; Ofwat 2004 pp14-19). However, it must be acknowledged that it is difficult to determine accurately the proportion of households in debt to companies as a result of poverty rather than an unwillingness to pay. Castro comments that On the basis of the available evidence, it can be argued that mainstream policies in England and Wales have contributed to reinforcing existing inequalities and poverty (Castro 2007:765). It is also argued that since 1999 it is difficult to distinguish between the can t pays and won t pays (Sawkins and Dickie 2008). This is because the ultimate sanction of losing the service via disconnection is no longer there to prompt won t pays to make payment. The most significant two issues relevant to poverty since 1999 are the regional diversity of bills, and changes in the benefits system that have reduced specific state support for bills - these are now discussed in detail below. 2.2 The impact of regional diversity of charges The creation of the Regional Water Authorities (RWAs), and subsequent privatisation of these leading to the formation of the current companies, has led to the potential for regional disparities in and sewerage charges. In effect each company holds a regional monopoly on supply for domestic customers. Although the specified social obligations on companies laid out by the government on privatisation have meant that geographical issues have not impacted on supply in the same way as was the case in the energy industries (such as areas where certain services are not available), a high level of regional variation exists between the charges made for supplies (Sawkins and Dickie, 2008). Regional variation occurs because of the K factor : i.e. the percentage increase or decrease in charges allowed each year to cover the costs of the repair, maintenance, and updating of infrastructure to ensure compliance with statutory obligations and environmental standards (Huby and Anthony, 1997: 207-8). This varies for each company as they have different local issues such as resource availability and infrastructure requirements. Accordingly investment priorities and costs vary across the industry. The regional variation in the level of bills was highlighted by an All Party Parliamentary Working Group (APPWG) report [there is] considerable regional variation both in terms of deprivation and costs (APPWG, 2008: 14). Whilst in the energy industries customers are able to shop around for the best deal, this is not possible for domestic customers due to the existence of regional monopolies. Whilst the Water Act 2003 makes provision for large-scale commercial users to change suppliers, a lack of uptake of this has been noted (APPWG, 2008), and the APPWG advise a cautious approach to the introduction of competition for domestic users (2008: section 5). Huby and Anthony highlight that regional variation exists not only in the level of bills, but in access to means of support in managing the payment of these (1997: 211). This takes three forms: differing types of support available to customers depending on the relationship between their company and local benefits agency (Op cit. 215); differing levels of availability and access to suitable advice and social services (Op cit. 211); and differing levels of accessibility of schemes such as WaterSure, designed to help vulnerable groups (Op cit. 214). As will be discussed below, existing universal (i.e. non-regional) forms of support offered do not necessarily take into account these regional variations. A final point to note is that regional variation in bills creates a unique difficulty among the essential utility services in arriving at a national solution; the issue of how to provide fairly the 23

24 APPENDIX A Literature review - Review of poverty - continued necessary support to customers with widely varying bills is problematic. This is a key point. 2.3 Water poverty and benefit recipients Changes in the benefit system following the privatisation of the industry meant that benefit recipients became responsible for paying bills, rather than this being administered between the (then) Department for Social Security and companies directly. The most significant changes to the benefit system occurred at the end of the 1980s, when Supplementary Benefit was replaced with Income Support. Early research into these changes found that Income Support (unlike its predecessor Supplementary Benefit) did not fully compensate for rising bills (Herbert and Kempson 1995), with Huby and Dix finding that amongst those living on Income Support, over three quarters were finding it difficult to pay their bills (1992: 220). The notional component of Income Support has failed to cover adequately increasing bills for three reasons: it did not cover the full amount of any region s average bill; it failed to address the issue of regional variation in charges, meaning that people in higher charging areas were affected disproportionately; the Rossi index, used to uprate benefit payments, was not applied to the component between 1988 and 1992, a time of large increases in prices (Sawkins and Dickie, 2008; Huby and Anthony, 1997). Post-1992, the Rossi index was applied to the and sewerage element of benefit payments, but it was not backdated for the period, resulting in an ongoing deficit (Sawkins and Dickie, 2008). This failure to uprate the component may have been a factor in increasing differences between benefit rates and charges, with a 91% increase in charges and 97% increase in sewerage charges over the period between and , whilst Income Support for the over 25s increased by only 41% over the same period (Huby and Anthony, 1997: 208). In practical terms, this resulted in an increased proportion of income going towards bills; a 1993 Ofwat report stated that 10% of the weekly income of some benefit-dependent households was spent on, and this was projected to increase to 14% by (cited in Huby and Anthony, 1997). This well exceeds the widely adopted figure used to identify households experiencing poverty, which is spending more than 3% of net income on and sewerage charges. Drakeford summarises the changes in the 1990s: costs have risen rapidly since privatisation, such costs fall particularly heavily on those groups within the population whose need for is greatest (does this statement only apply to metered households rather than those on fixed bills as well?) GM It will do by the nature of support for vulnerable households poorer people are more likely to be metered, and metering is required for accessing sure, and these groups in turn are also more likely to have to rely on state benefits for their maintenance. State benefits however, have proceeded in exactly the opposite fashion to costs.benefit levels have failed to keep pace with prices (1997: ). 24

25 1988/ / / / / / / / / / / / / / / / /05 Per cent APPENDIX A Literature review - Review of poverty - continued Figure 1 presents data from 1988 to 2005, analysing the percentage of which Income Support payments cover average charges. 19 The middle line in Figure 2 provides a figure for average bills, showing that the extent to which the assumed allowance for bills within income support initially covered around 80 per cent of costs in 1988, falling to 54 per cent in , and then rising to over 60 per cent between , and then falling back down to 58 per cent in However, it is important to note that since the Labour Government came to power in 1997 there have been substantial real increases in Income Support for families with children and Pension Credit for pensioners. The failure to incorporate into the Rossi index until 2002 only really now affects single and childless couples on Income Support who only have had their benefits increased in line with the index. Figure 1: Benefit element as percentage of average charge, adapted from Sawkins and Dickie (2008: 81-82) % benefit % thames % south west 20 0 Year As described above, the post-privatisation regional variations in charges have also had an affect on affordability with Huby and Anthony (1997) considering the variation between standardised benefit payments for and regional variations in bills: People living on standard rates of benefit in areas with higher charges clearly face more pressures on household budgets than those in areas where 19 Several assumptions are made by the authors here. When Supplementary Benefit was replaced by Income Support, the average estimated bill for those receiving SB was 1.65 per week. This has been uprated using the ROSSI index, and compared against increases in charges (see Fitch 2002, and Sawkins et. al 2008). 25

26 APPENDIX A Literature review - Review of poverty - continued bills are lower (1997: 211). These variations are also demonstrated in Figure 2 this allows a comparison between the highest average charges (South West Water), with the lowest (Thames Water as at ?)). Whilst the general trends remain the same, the assumed allowance for bills within Income Support covered 92 per cent of costs in Thames Water area in 1988, falling to the lowest point of 65 per cent in , and rising back to 69 per cent in This compares to 67 per cent in South West Water area in 1988, reducing to 37 per cent in , and rising back to 40 per cent in For benefits claimants, the movement away from having direct payments of benefits to companies has meant that since 1988 regional variation is no longer subsidised: claimants in higher-charging areas simply have to spend a higher proportion of their income on bills (Sawkins and Dickie, 2008: 79; Huby and Anthony, 1997: 210). Within academic literature it has been widely acknowledged that since privatisation, poorer customers are struggling to pay bills (Huby, 1995; Huby and Anthony, 1997; Sawkins and Dickie, 2008). Bakker s study found that 75% of Income Support claimants struggle to pay for and that for low-income families the most rapidly rising component of overall debt related to (Bakker, 2001). This is reflected in the rate of increases in costs and benefits, and, as outlined above, benefit rates for single people and childless couples of working age have not increased in line with increases in prices. The burden of infrastructural and environmental maintenance and development required by companies, then, which is evenly distributed between customers within each region, can be seen to produce a disproportionately high burden on low-income households, especially those which depend on benefits (Huby, 1995: 224). 2.4 The effects of being poor Little has been written concerning the individual impact of poverty on customers and households, and much information is old and therefore partially outdated due to changing regulations, particularly the 1999 Water Services Act. Literature tends to focus on certain groups who are vulnerable to experiencing difficulties in making payments, including those in receipt of benefits, older people, and families (see Sawkins and Dickie, 2008; Huby, 1995; Hills, Huby and Anthony, 1997). Water and sewerage costs remain a relatively low proportion of incomes in comparison to other outgoings. However, recent increases in the cost of other essentials, including food and fuel for domestic and travel uses, result in the fixed cost of imposing a significant and inflexible burden. Indeed, those spending more than 3% of their net income on will have to reduce their spending on other consumables such as food or energy (or face the risk of debt). In 1992 a National Association of Citizens Advice Bureaux (NACAB) report indicated that debt arising from difficulties in paying charges has been found to impact on mental health: summonses issued as a result of non-payment caused distress, especially to older customers, and poverty has been linked to worry, family tensions and arguments (NACAB, 1992; Huby, 1995: 220). Huby comments that debts can have impacts on living standards, health and wellbeing (1995: 221). In their Water Pricing report, the House of Commons Environment, Food and Rural Affairs Committee quote Dr Noel Olsen as saying of many customers in Devon and Cornwall that and sewerage charges have reached a point where their affordability has become a threat to public health, and that a poor diet and social isolation are inevitable if debt is to be avoided and an excessive charge absorbed out 26

27 APPENDIX A Literature review - Review of poverty - continued of a standard pension income (2003: 12). However, there appears to be a lack of coordinated research in to the quantitative and qualitative impacts of poverty on those experiencing it. 3. Existing mechanisms that support vulnerable groups Governmental and parliamentary groups, in addition to consumer and regulatory bodies, agree that it is necessary to support vulnerable groups in paying their bills (APPWG, 2008; CCWater, 2008; DEFRA, 2008); however, there are some discrepancies in how vulnerable groups are defined. The measure used for defining the poor is those spending 3% or more of their annual disposable [net] income on bills (DEFRA, 2007b). Furthermore, DEFRA also state that because of the government s priority of protecting and supporting vulnerable groups, Ofwat have particular responsibilities towards: the disabled or chronically sick pensioners individuals on low incomes those in rural areas and those whose premises are not eligible to be supplied by a licensed supplier (DEFRA 2008: 8). The Vulnerable Groups Regulations (VGR) provide the basis for eligibility for WaterSure, the criteria for the social tariff 20 are presented in Box 1. The numbers of those applying for WaterSure have increased significantly between , however, the actual number of recipients are very small (see below). Box 1: criteria for WaterSure In receipt of at least one of the following benefits Council Tax Benefit Housing Benefit Income Support Income-based Jobseeker's Allowance Working Tax Credit Child Tax Credit (except families in receipt of the family element only) Pension Credit Additional criteria Must have responsibility for three or more children (under 19) in full time education living in the home OR proof of at least one specified medical condition: desquamation (flaky skin disease); weeping skin disease; incontinence; abdominal stoma; Crohn's disease; ulcerative colitis; renal failure requiring dialysis at home (where there is no contribution by the local health authority to the cost of the used) In addition, all WaterSure households must be metered (this should be included in the criteria above). As of April 2005 if a customer is in receipt of the benefits listed above, they may also be eligible for WaterSure if a doctor certifies that they have a medical condition that requires a significant amount of. 20 Previously known as the Vulnerable Groups Scheme 27